London, 10 June 2011 -- Moody's Investors Service has today increased the refinancing margins
and lowered the timely payment indicator (TPI) to High from Very High
for the covered bonds in the following programmes:
BRFkredit, Capital Centre B
BRFkredit, Capital Centre E
BRFkredit, General Capital Centre
DLR Kredit A/S, Capital Centre B
DLR Kredit A/S, General Capital Center
Nordea Kredit Realkreditaktieselskab, Capital Centre 2
Nykredit Realkredit A/S, Capital Centre D
Nykredit Realkredit, Capital Centre E
Nykredit Realkredit A/S, General Capital Centre
Nykredit Realkredit A/S, Capital Centre G
Realkredit Danmark A/S, Capital Centre S
Realkredit Danmark A/S, General Capital Centre
The covered bonds of the following programmes are not affected by the
above changes:
Danske Bank A/S - Register D
Danske Bank A/S - Register I
Nordea Kredit Realkreditaktieselskab Capital Centre 1
Nykredit Realkredit A/S Capital Centre C
Totalkredit Realkreditfond Capital Centre C
At the same time, Moody's has aligned the rating for the junior
covered bonds (JCB) of Nykredit Realkredit's Capital Centre E with
the issuer's rating. The JCB rating remains under review
for possible downgrade, as Nykredit Realkredit's issuer rating
also remains under review for possible downgrade.
RATINGS RATIONALE
The refinancing margins have been increased following the material rise
in adjustable-rate mortgage (ARM) loans in Danish cover pools.
The outstanding volume of bonds for financing ARM loans increased to DKK1,217
billion from DKK636 billion between 2008 and 2011, according to
the 2011 Financial Stability report of Denmark's Nationalbank.
These covered bonds now represent about half of all outstanding covered
bonds in Denmark.
ARM loans differ from other mortgage products financed in the Danish covered
bond market, as there is a mismatch between the underlying loan
term and the term of the covered bond refinancing the loan. Typically,
ARM loans mature after twenty to thirty years, while the covered
bonds mature every one to three years. Hence, there is refinancing
risk and the issuers' dependence on regular market access to issue
covered bonds has increased with the growing volume of ARM loans.
Moody's acknowledges that this risk is mitigated by the "pass-through"
nature of the loans, with any increased funding costs being passed
directly to the underlying borrower. However, Moody's
still considers this product to be more exposed to refinancing risk than
traditional products, where the loan and bond term is matched.
Moody's notes that Danish issuers have started to spread their refinancing
requirements for ARM loans over the year rather than concentrating the
refinancing of ARM loans to December of each year. In our opinion,
the spreading out of the refinancing requirements is a positive development
but not in itself sufficient to fully remove the refinancing risk inherent
in ARM loans.
Moody's has also looked at the reduction in the levels of systemic
support for Danish banks compared with pre-crisis levels.
In a low support environment, Danish banks owning covered bond issuers
may not have as great a capacity to support the covered bond market as
they had in the past. At the same time Moody's notes that
the credit worthiness of independent mortgage credit institutions has
weakened. Moody's considers this a relevant factor to take
into account in the context of the increased refinancing that needs to
take place in the market.
Moody's views the Danish covered bond market as a robust one,
having been strong through the financial crisis of 2008, and assumes
it will continue to function effectively in most conceivable circumstances.
This is reflected in the TPI assessment of High, which compares
favourably to other European jurisdictions with strong covered bond frameworks.
RATING METHODOLOGY
The principal methodology used in this rating was Moody's Approach to
Rating Covered Bonds published in March 2010.
Moody's considers the increased refinancing risk in terms of (i)
the expected loss analysis; and (ii) the TPI assessment.
(i) Moody's determines the covered bond rating based on the expected
loss of the bond. The increase of the refinancing margin increases
the modelled cover pool losses due to market risk. Moody's
expected losses due to market risk, following issuer default,
have increased from an average 4% to an average of 7%,
at present. The relevant issuers may be able to offset any deterioration
in the expected loss by adding further collateral to their programmes.
Moody's will monitor the issuer's decisions and incorporate
them into its rating assessment. For JCBs, Moody's
has removed any uplift over and above the issuer's rating,
following the additional stresses added to the analysis through increased
refinancing margins. Higher refinancing stresses result in reduced
recoveries for the JCB. Hence, the expected loss analysis
no longer results in a single-notch uplift above the issuer rating.
(ii) Moody's assigns a TPI which indicates the likelihood that timely
payment will be made to covered bondholders following issuer default.
The covered bond's refinancing risk is an important consideration
for setting the TPI and Moody's has reduced the TPI from Very High
to High for all but three covered bonds programmes. A TPI of High
reflects a high likelihood of timely interest and principal payments.
The covered bond programmes not affected by the TPI reductions are programmes
with negligible shares of ARM loans relative to the level of overcollateralisation
in the cover pool, namely Nykredit Realkredit A/S Capital Centre
C, Totalkredit Realkreditfond Capital Centre C and Nordea Kredit
Realkreditaktieselskab Capital Centre 1. For the JCB, Moody's
has not assigned a TPI given the full linkage between the rating of the
JCB and the issuer's rating.
SENSITIVTY ANALYSIS
The TPI framework will limit the covered bond rating if the issuer's
rating is downgraded below a certain level. The TPI Leeway measures
the number of downgrade notches of an issuer's rating that a covered
bond rating can withstand, without suffering a downgrade under Moody's
TPI framework. The reduction of the TPI from Very High to High
implies for most covered bond programmes that the TPI Leeway is reduced
by one notch. Based on the current issuer rating and a TPI of High,
the TPI Leeway of Danish covered bond programmes is between one and five
notches, which means that the current TPI Leeway does not pose a
cap to the maximum possible covered bonds rating. Moody's
will publish the TPI Leeway for every covered bond programme in due course.
The rating assigned by Moody's addresses the expected loss posed to investors.
Moody's ratings address only the credit risks associated with the transaction.
Other non-credit risks have not been addressed, but may have
a significant effect on yield and to investors.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information and confidential and proprietary Moody's Investors
Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
LIST OF AFFECTED SECURITIES
Issuer: Nykredit Realkredit, Capital Centre E
....474NYKEJCB15 Junior Covered Bond due 1/1/2015,
Downgraded to A1 and Remains On Review for Possible Downgrade; previously
on Apr 19, 2011 Aa3 Placed Under Review for Possible Downgrade
....F3NYKEJCB13 Junior Covered Bond due 10/01/2013,
Downgraded to A1 and Remains On Review for Possible Downgrade; previously
on Apr 19, 2011 Aa3 Placed Under Review for Possible Downgrade
....F6NYKEJCB16 Junior Covered Bond due 04/01/2016,
Downgraded to A1 and Remains On Review for Possible Downgrade; previously
on Apr 19, 2011 Aa3 Placed Under Review for Possible Downgrade
....F6NYKEJCB14 Junior Covered Bond due 01/15/2014,
Downgraded to A1 and Remains On Review for Possible Downgrade; previously
on Apr 19, 2011 Aa3 Placed Under Review for Possible Downgrade
....EUR500M Junior Covered Bond due 04/01/2014,
Downgraded to A1 and Remains On Review for Possible Downgrade; previously
on Apr 19, 2011 Aa3 Placed Under Review for Possible Downgrade
....287NYKEJCB14 Junior Covered Bond due 10/01/2014,
Downgraded to A1 and Remains On Review for Possible Downgrade; previously
on Apr 19, 2011 Aa3 Placed Under Review for Possible Downgrade
....EUR200M Junior Covered Bond due 12/30/2011,
Downgraded to A1 and Remains On Review for Possible Downgrade; previously
on Apr 19, 2011 Aa3 Placed Under Review for Possible Downgrade
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Alexander Zeidler
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Madrid
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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Canary Wharf
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Moody's increases refinancing margins for some Danish covered bonds; TPI reduced
